cross-posted from citizenshipsolutions.ca
by John Richardson
Most meetings with Mr. #FBAR take place in "The Twilight Zone" https://t.co/9UJw0GxGIf pic.twitter.com/uqjqYsKKtZ
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
This post is one more of a collection of FBAR posts on this blog. The most recent FBAR posts are
here and here.
The “unfiled FBAR” continues to be a problem for certain Homeland Americans with “offshore accounts” and all Americans abroad, who continue to “commit personal finance abroad”.
Be careful what you "fix for"! What to do about the unfiled #FBAR https://t.co/sAh01HpWin via @ExpatriationLaw = "small steps = big results"
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
The above tweet references a recent post which discussed how to “fix past compliance problems“. The introduction included:
This blog post will hopefully encourage those with U.S. tax issues to consider whether they can deal with minor/unintentional FBAR violations as a “stand alone single problem”. There may be no need to escalate and expand one single problem into a multi-dimensional full blown tax problem that may end up with unintended and unanticipated costly professional fees as well as undue time spent! Read on and learn why. Keeping a calm head is most important, even if it is most difficult
to do in the face of the scary situation of not being in compliance with the U.S. tax and regulatory regime.
Introducing Mr. and Mrs Kentara – When the innocent enter the “Twilight Zone” …
The facts (as reported by Virginia La Torre Jeker in her outstanding analysis) …
In Kentera v. United States, 2017 U.S. Dist. LEXIS 12450 (ED WI 2017), the US District Court dismissed a complaint filed by a husband and wife living in California. The Kentera’s were seeking review of FBAR nonwillful penalties asserted by the IRS. The nonwillful FBAR penalties were assessed pursuant to an audit after the couple withdrew from the IRS’ 2011 Offshore Voluntary Disclosure Initiative ( VDI).
The facts of the case are taken from the plaintiff’s complaint, which can be read here. In summary, they are as follows:
In 1984, after the death of his father, the plaintiff-husband, Milo Kentera, inherited a Swiss foreign bank account at Banque Cantonale de Geneve (Swiss Account). The account was automatically transferred to the plaintiff at the death of his father, so the plaintiff did not take any action in creating this account. Sometime soon afterwards, Milo added his wife’s name to the Swiss Account. The balance in the account was under USD10,000 through 2004 but increased somewhat in 2005-06 going over the USD10,000 FBAR filing threshold. The Swiss Account increased significantly in 2007 upon the sale of the plaintiff’s parents’ Montenegro real property. Some of the sales proceeds were distributed to plaintiff Milo and deposited in the Swiss Account, with the balance paid to Milo’s siblings.
Neither of the plaintiffs were well-versed in US tax matters. The husband was a pharmacist and his wife was a homemaker. Since 1984 when the account was inherited, the plaintiffs always disclosed the Swiss Account to their various accountants on tax organizers and always disclosed the account on their federal income tax returns (Schedule B). However, when the account first exceeded USD 10,000 in 2005, their first accountant failed to prepare or file an FBAR for the plaintiffs. Their second accountant continued this FBAR failure for a number of years despite the fact he clearly knew of the existence of the account from the prior tax returns given to him by the plaintiffs; he also failed to ask if any foreign interest was earned on the account, and consequently,interest income was omitted. In 2010, a third accountant acknowledged the existence of the Swiss Account on the plaintiffs’ return and included interest income from the Account, but she also failed to prepare or file an FBAR. Please note, certainly a tax professional should have been well aware of the FBAR filing rules by the time a 2010 FBAR should have been filed (i.e., June 30 2011). At this time the first IRS OVDI had been in full swing, having been initiated in 2009 and many professional and non-professional articles were written about the problems with FBAR.
Sometime in approximately September 2011, the plaintiffs entered the recently announced IRS 2011 OVDI program. They amended tax returns to include omitted interest income from the Swiss Account and filed completed FBARs for the 6 year period, 2005-2010. In August 2013, the IRS provided Plaintiffs with a Form 906, Closing Agreement assessing a miscellaneous penalty of $90,092. The complaint stated that plaintiffs “withdrew” from the OVDI program the following month. I believe the plaintiffs “opted out” of the program, but am not sure. They were soon the subject of examination by an IRS agent. The IRS agent recommended that plaintiffs be assessed non-willful FBAR penalties under the Bank Secrecy Act, and later proposed assessing the penalties as follows:
1) As to the husband, Milo Kentera: $500 for calendar year 2006; and
$10,000 per year for calendar years 2007, 2008, 2009, and 2010, for a
total penalty of $40,500.
2) As to the wife, Lois Kentera: $500 for calendar year 2006; and $2,500
per year for calendar years 2007, 2008, 2009, and 2010, for a total
penalty of $10,500; and
Plaintiffs protested the penalties at IRS conferences, but their protests fell on deaf ears and the IRS sent each of the plaintiffs a letter of an “appeals determination,” upholding the IRS’ proposed FBAR penalties against each of them. The plaintiffs then filed the complaint in District Court. In their complaint, plaintiffs asserted that the IRS incorrectly assessed the FBAR penalties. First, on grounds that the Bank Secrecy Act prohibits the imposition of an FBAR penalty if the violation was “due to reasonable cause.” 31 U.S.C. § 5321(a)(5)(B)(ii)(I). [I note here that the statute requires not only “reasonable cause” but also that “the amount of the transaction or the balance in the account at the time of the transaction was properly reported”.]
My initial thoughts …
The facts suggest that Mr. and Mrs. Kentera were people who believed in compliance with the law. The history of their tax filings suggests a conscious effort to comply with the applicable laws. They also (like everybody) were completely at the mercy of their tax advisers. The “offshore account” (which was not opened by them) was disclosed to their tax preparers. The tax preparers failed to advise Mr. and Mrs Kentera to file their FBAR (a requirement that few in 2011 knew about).
This series of events took place during the “2011 IRS Reign of FBAR Terror“. At this time many lawyers and accountants strongly recommended that people (1) correct their mistakes (the nonwillful ones that were the result of not knowing about Mr. FBAR) and (2) correct those mistakes by agreeing to the OVDP/OVDI penalty program (that is/was analagous to a form of “Civil Forfeiture“).
The evidence strongly suggests that Mr. and Mrs. Kentera were ordinary people, trying to do the “right thing”. They were victimized by advice to enter OVDI and then victimized by the IRS because they entered OVDI. (To get a sense of the context of how people were victimized by trying to do the “right thing”, read Phil Hodgen’s April 5, 2011 post here. There were many other posts written during this period. To see how Green Card holders were victimized by the OVDI program see here and here.)
How could the IRS possibly assess this kind of FBAR penalty?
All “armchair quarterbacks” must remember the context in which individual decisions were made. In 2011, there were NO streamlined compliance procedures. There were no delinquent FBAR submission procedures. There were no Delinquent Information Return Procedures.
That said, there was also NO requirement that people enter OVDI.
Tragically those who tried the hardest, and acted most quickly, to fix their non-compliance problems were the most harshly treated. (In fact, the history of the IRS assault on Americans abroad has shown that that those who did NOT rush to fix their problems fared much better. You may remember the “This is your last best chance to come into compliance” threats directed to those (including Americans abroad)with
offshore non-U.S. bank accounts.)
To put it simply: The Kentera’s were victims of their desire to be in compliance with the law. It is regrettable that their law abiding sentiments coincided with the 2011 atmosphere of threats from the IRS and fear mongering from the compliance industry.
Why OVDP is extremely dangerous …
To enter OVDI or OVDP is to enter a program where you interact with the IRS outside the provisions of the Internal Revenue Code. You agree to interact with the IRS outside the framework of the existing laws. OVDP is appropriate for ONLY the very small group of people who may face serious penalties and (criminal) punishment.) OVDP is completely inappropriate for Americans abroad (where all of their assets are foreign and all assets are therefore subject to penalty assessment).
But, once you enter OVDP …
In my humble opinion, Mr. and Mrs. Kentera were subjected to this penalty because they entered OVDI. Because, they entered the program, there must have been a presumption that they somehow “deserved to be there”. As Virgina La Torre Jeker points out:
The point to be taken is the IRS’ apparent lack of sympathy with the taxpayers’ arguments concerning “reasonable cause”. It will be remembered that the IRS has discretion to assess FBAR penalties after taking into account all the facts and circumstances. See the IRS Manual regarding FBAR penalties here. Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter. The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achievedby issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.
For more about FBAR penalties and the “FBAR Penalty Mitigation Guidelines”, see the discussion by Michael Deblis here.
What happened was that Mr. and Mrs. Kentera “signed up” to pay an FBAR penalty when there is a good chance that one would never have been imposed in the first place!
Incredible! What should/could have resulted in a “warning letter” resulted in a full blown FBAR penalty (plus the professional fees to attempt to reverse the penalties).
Why did people do it? Why did people enter OVDI in the first place?
The problem of people being “ushered into OVDI/OVDP” by their advisers has been the subject of much discussion. See the following discussion of Jack Townsend’s blog:
"Presumably, the couple entered OVDI on the advice of an attorney and, ultimately, were assessed…" — Stephen Kish https://t.co/XiPlOsz1GB
— Citizenship Lawyer (@ExpatriationLaw) February 4, 2017
"I'm a bit curious why there was omitted income, given that the account was (we are told…" — Michael J. Miller https://t.co/MEq0a4Wz9Y
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
I’m a bit curious why there was omitted income, given that the account was (we are told) consistently disclosed on the taxpayers’ return, but mostly I’m curious why they were in OVDI in the first place.Presumably the taxpayers and their counsel could have predicted from the outset that they would need to opt out if they were unwilling to pay the 25% offshore penalty; and I generally see little merit in going into OVDP if you know (or should know) in advance that you’ll be opting out.
Obviously, the compete set of facts (most of which we don’t know) is critically important, so I’m certainly not purporting to reach any conclusions, but I think it’s fair to at least wonder if a non-program disclosure might have been more appropriate in this instance. I do vividly recall that some practitioners were vehemently opposed to the whole notion of a “quiet disclosure,” although I do not recall any coherent reason ever having been advanced for such opposition.
Conclusion: “Look Before You Leap …
To #OVDP or to NOT #OVDP – the greater the attempt to fix past compliance issues, the greater the punishment. https://t.co/HblKpihu0C
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
I certainly agree with Virgina La Torre Jeker’s conclusion which states:
The IRS disposition of the case was disappointing, to say the least. One has to ask why, on these facts, the taxpayers joined OVDI in the first place? My guess is that the fear factor was ramped up significantly and they may not have been given full detailed advice by their tax advisor as to all of the possible options, risks with each one and so on. One must also remember that at the time the taxpayers joined OVDI, the Streamlined options did not exist. The case demonstrates that
one must be very careful in taking actions. Get a second or even third opinion.”
Yes, yes and yes!!
If you have FBAR problems …
Get a second or third opinion! Be careful what you fix for!
(For those who want further reading (including the details) see the following court documents:
United States Motion to Dismiss – here.
Memorandum in Support of United States Motion to Dismiss – here.
Mr. & Mrs. Kentera’s Brief in Opposition to United States Motion to Dismiss – here.
United States Reply to Mr. & Mrs. Kentera’s Opposition Brief – here)
@Karen, thanks for the information. Many tax authority from different jurisdictions reported to irs. With such huge data flow, don’t think irs can implement comparison mechanism by mar 2019.
by the way, you work for irs?
‘Plus, when we got data from the ATO, they told us that there were duplicate records (but no idea how many). So we would expect that the number of FFI reports would be orders of magnitude larger than the number of 8938s filed.’
@eric says “by the way, you work for irs?” LOL!
I’m no longer a US citizen. We sent a freedom of information request to the Australian Tax Office asking for aggregate statistics on the data they had sent to the IRS via FATCA, and they sent us the data – see the blog post I linked in my last reply. Australia appears to be the only country willing to disclose aggregate FATCA statistics – similar requests have been denied in several other countries.
Canadian banks report end of year balances.
The CRA has updated its FATCA guidance.
“In the first five years of FATCA, there has been a lot of growing pains as Canadian financial institutions embraced, sometimes reluctantly, their new responsibilities to review, identify and report financial accounts of specified U.S. persons (i.e., U.S. reportable accounts). Generally, while Canadian financial institutions made their best efforts to ensure they were complying with their obligations under Part XVIII of the Tax Act, there has not been much in the way of oversight of their activities nor repercussions for failures to meet service standards in due diligence and reporting. More recently, announcements from both the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA) have indicated that the honeymoon period for FATCA compliance may be coming to an end.”
Lots of interesting news here, including reporting exemptions for condos.
Interesting. But the only aspect of the honeymoon period purportedly ending that impacts ordinary folk, in my reading, is the reference to making more effort to collect TINs for reportable accounts from 2020 onwards. I see no reference here to any changes in the current detection regime – if there are no US indicia then the banks may continue to rely exclusively on self-certification. Compliance remains optional.
@Karen, thanks for your information. So you are in Australia, have you ever heard fbar penalty is enforceable in Australia? I read something about OECD about mutual assistance for recover tax claim. In the meantime I knew only 5 countries have mutual assistance in their tax treaties with US, not sure which one takes preference.
Eric, I don’t think you’ll receive any advice beyond what you’ve already received.
@Nononymous, OK, thanks. Still worried, but did not find any specific case.
@eric – The US ratified the original OECD Convention on Mutual Assistance in Tax Matters (https://www.congress.gov/treaty-document/101st-congress/6/resolution-text), but refused to agree to provide any assistance in tax collection for other governments (and therefore cannot call on other governments to assist with collection of US tax). The US has signed but has not ratified the 2010 protocol to this Convention.
As for the countries with mutual assistance in their treaties – they will not enforce US tax obligations against their own citizens. See this post http://isaacbrocksociety.ca/2016/11/01/dual-citizens-of-sweden-france-netherlands-denmark-canada-take-note-your-country-will-not-collect-for-the-u-s/
@karen, thank you so much, it is funny, Who is the bully? Do you know anything about Pomerantz case, a dual Canadian and US citizen residing in Cananda? US sued him for $1 million fine, if the penalty is not enforceable in Canada, did the guy eventually get off hook or pay the fine?
@BB, I found this to be very interesting since it seems to make some accounts reportable forever if they are ‘new’ accounts (according to FATCA definition of ‘new’ vs. ‘pre-existing’) once the reporting threshold balance is met;
“…..The CRA was asked whether a new individual depositary account that exceeds US$50,000 threshold provided for in the IGA may be designated under subsection 264(1) of the Tax Act in a subsequent year if the depositary account balance drops below the US$50,000 threshold at the end of that subsequent year. The CRA confirmed that once the US$50,000 threshold is exceeded at the end of any given year, it remains reportable regardless of its balance in subsequent years, and thus may no longer be designated not to be a US. reportable account pursuant to paragraph 264(1)(b) of the Tax Act. The CRA also noted that the reporting obligation for new individual depositary accounts is different than that for pre-existing individual depositary accounts. …..”
Lots more scope for unecessary and unwarranted surveillance and reporting of local accounts which don’t even meet the ‘high risk’ threshold if in one year it meets/exceeds the 50,000. but drops down below that in all subsequent years. And, given that the CRA admits ( in submissions by defendant side in ADCS lawsuit) that once it has the info it can use it for domestic purposes as well, that is lots more info they wouldn’t have had otherwise, and which is not based on any reason to suppose guilt. More evidence of discrimination against some Canadian resident taxpayers with US indicia since other Canadian residents whose accts meet or exceed the $50,000. threshold would not have their accts reported forever afterwards regardless of balance (and in the absence of reportable taxable interest earned).
‘do not understand.
“Appendix V is the star attraction of that report. Now you know what to put on a US income tax return.”’
Put stars in every field on a US income tax return.
“…..The CRA was asked whether a new individual depositary account that exceeds US$50,000 threshold provided for in the IGA may be designated under subsection 264(1) of the Tax Act in a subsequent year if the depositary account balance drops below the US$50,000 threshold at the end of that subsequent year. The CRA confirmed that once the US$50,000 threshold is exceeded at the end of any given year, it remains reportable regardless of its balance in subsequent years, and thus may no longer be designated not to be a US. reportable account pursuant to paragraph 264(1)(b) of the Tax Act.”
I for one am not surprised. Once they have the info, it doesn’t go away and will be used by anyone who has access to it for whatever purposes they want.
@ND, man, you are a genius.
Fatca is a complete failure. Cost in the billions, added tax revenue zero. And yet the bureaucrats whose jobs depend on it can’t possibly admit that. They continue to insist it’s going to be worthwhile. Just a few more tweaks and threats. Talk about putting lipstick on a pig. Canada would be doing them a huge favour by refusing to have anything more to do with it.